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2023 (1) TMI 1323 - AT - SEBIProhibition of manipulative fraudulent and unfair trade practices - charge that NSE and its employees have colluded with TMs especially OPG Securities Pvt. Ltd. - profit made by ISB in its report is on the basis of early login by OPG - show cause notice alleged that OPG gained materially by being the first logger as well as by connecting to the secondary server -WTM directed OPG debarring accessing the securities market for a period of five years and restraining OPG from taking any new clients for a period of one year and its Directors to disgorge jointly and severally a sum of Rs.15.57 crores alongwith interest at the rate of 12% p.a - HELD THAT - The show cause notice alleged that OPG gained materially by being the first logger as well as by connecting to the secondary server. In this regard NSE had appointed ISB to calculate the profits earned by TMs including OPG especially on days when they logged in first to the PDC either from the primary server or from the secondary server. The ISB in its report took 30 days on sample basis and analysed the same for the period 2012 and 2013 which were the days when OPG had consistently logged in first. ISB in its report submitted that OPG made higher profits close to Rs.25 crores when they logged in early. Based on this ISB report the show cause notice directed OPG to show cause as to why the profit of Rs.25 crores should not be disgorged. The ISB report used First-In-First-Out (FIFO) methodology to calculate both intraday and overnight profits. Intraday profits are profits generated through positions that are opened and closed on the same day. Overnight profits are profits generated through positions opened on a prior day and closed on that particular day A perusal of the terminology First Prop indicates that the profits made by the TM is on the basis of its trades made on days when he logged in first into a Port. WTM has calculated the unlawful gain on the basis of table A11 and A15 of the ISB report. A perusal of the aforesaid tables indicates that the calculation has been made on the basis of First Prop and Non-First Prop . The First Prop analysis is based on when OPG logged in first. When the WTM has given a finding that early logging in does not give any advantage and could only be given a probabilistic advantage the question of calculating profits on the basis of early login becomes wholly erroneous. The WTM could only consider probabilistic advantage if any which the OPG may have gained by being the first logger. Thus on this aforesaid short point the calculation of unlawful gain made by the WTM cannot be accepted. To conclude we find that all the charges leveled in the show cause notice has not been proved. Many of the charges were dropped by the WTM himself while passing the impugned order. The WTM held that the charge of fraud and unfair trade practice by NSE under PFUTP Regulation is not made out. The charge that NSE and its employees have colluded with TMs especially OPG has not been made out. The allegation of suppression of material facts and non-cooperation by NSE with the investigating authorities has not been made by the WTM. We also find that early log in by TM did not create any advantage with regard to dissemination of data. May be a probabilistic advantage is obtained by a TM on account of early login but in the absence of any further evidence on this aspect no adverse orders can be passed. We also hold that there was randomness in the dissemination of data in the TBT architecture and therefore there was no requirement to add a randomiser to the existing TBT architecture. NSE failed to monitor the secondary server which led many TMs especially OPG to misuse it to their advantage. NSE failed to follow its own norms and guidelines framed for such purpose. NSE should have placed a mechanism to check unauthorized access to the secondary server by the TMs. NSE should have placed a defined policy for use of secondary server and a mechanism ought to have been placed for monitoring connection by TM on the secondary server since it was an active server. WTM further held that failure to place the randomizer or load balancer in the TCP IP dissemination protocol cannot be categorised as breach of the principles of fairness and equity attracting the provisions of PFUTP Regulations. The WTM held that the dissemination of information which is in breach of the stipulation contained in SECC Regulations cannot automatically attract the rigors of PFUTP Regulations without there being any proof to indicate fraud. The WTM held that in the absence of any fraud or collusion or connivance the possibility of fraud was non-existent. Charge that NSE has violated Regulation 41(2) and 42(2) of SECC Regulations is not proved. NSE provided a level playing field for TM subscribing to the TBT data feed of NSE and provided equal unrestricted and fair access from the TBT architecture. We however found that the circular of 30th March 2012 was not followed by NSE. WTM exonerated OPG and its Directors on issue of first login and crowding out other TMs. We however affirm the findings of the WTM that OPG gained an unfair access and advantage by consistently log in to the secondary server and made unlawful gains. We however find that for violation of the circular there can be no disgorgement by NSE or by Mr. Ravi Narain and Ms. Chitra Ramkrishna. Insofar as Mr. Ravi Narain and Ms. Chitra Ramkrishna are concerned the order of disgorgement cannot be sustained. We also find that order of disgorgement against NSE also cannot be sustained. We have already held that NSE did not commit any violation of Regulation 41(2) of the SECC Regulations. We have also found that TBT architecture provided unrestricted transparent and fair access to data dissemination from its TBT architecture to the TMs. We have also found that there was lack of due diligence while allocating IPs on various Ports and that there was inequitable distribution of IPs. We also found that a load balancer should have been placed for equitable distribution of the IPs. We also found that there was failure to monitor frequent connections to the secondary server by certain TMs. Even though NSE has not indulged in any unethical act or has unjustly enriched itself the direction to disgorge in our opinion cannot be sustained. However NSE has not adhered to its own norms and guidelines and has not followed the circular. The SCRA Act confers a large responsibility upon the exchange to ensure that undesirable transactions do not take place. Being a first level regulator it has a front line responsibility for regulation of the market and has a mandate to ensure compliance by the TMs of its own norms guidelines and circulars. NSE has a duty to ensure transparency and fair access to all the TMs. For lapses committed by NSE directions under Sections 11 and 11B could be passed and some of the directions of the WTM were rightly passed. However the direction for disgorgement was unwarranted but the appellant NSE cannot be allowed go scot free and is required to pay a price for the lack of due diligence on account of human failure to comply with the circular in letter and spirit. Though there are no parameters to quantify the lapse committed by NSE but taking into consideration all facts and circumstances of the case and the factors contemplated under Section 15J of the SEBI Act read with 23J of the SCRA Act and in exercise of the powers confirmed upon this Tribunal under Rules 21 of the Securities Appellate Tribunal (Procedure) Rules 2000 we are of the opinion that NSE should pay a sum of Rs.100 crores for this lapse which is not expected from a first level regulator and which would act as a deterrent. In view of the reasons given in the preceding paragraph a. We set aside the order of the WTM directing disgorgement of an amount of Rs.624.89 cores alongwith interest at the rate of 12% p.a. against NSE. b. Directions given by the WTM prohibiting NSE from accessing the securities market directly or indirectly for a period of six months and further directing NSE to carry out system audit at frequent interval after thorough appraisal of the technological changes introduced from time to time is affirmed. c. We direct NSE to deposit a sum of Rs.100 crores to the Investor Protection and Education Fund created by SEBI. This amount will be adjusted by SEBI pursuant to the deposit already made by NSE vide our interim orders dated 22nd May 2019 and 17th May 2021. The excess amount alongwith interest accrued shall be refunded by SEBI within six weeks. The appeal of NSE is partly allowed. d. The direction to disgorge 25% of the salary from Mr. Ravi Narain and Ms. Chitra Ramkrishna is set aside. e. The direction prohibiting Mr. Ravi Narain and Ms. Chitra Ramkrishna from associating with any listed Company or a market infrastructure institution or any other market intermediary for a period of five years is set aside and substituted for the period undergone by them. The appeals for Mr. Ravi Narain and Ms. Chitra Ramkrishna are allowed. f. The direction of the WTM directing NSE to initiate enquiry against its employees is affirmed. g. The violations committed by OPG as found by WTM is affirmed. However the direction of the WTM directing OPG and its Directors to disgorge Rs.15.57 crores alongwith interest at the rate of 12% p.a. from 7th April 2014 onwards is set aside. The matter is remitted to the WTM to decide the quantum of disgorgement afresh in the light of the observation made above within four months from today. h. In addition to the above we direct the WTM to consider the charge of connivance and collusion of OPG and its Directors with any employee/officials of NSE. Further the WTM will decide the issuance of direction/penalty concealment/destruction of vital information and will further reconsider Issue No. 2 relating to crowding out other market participants. i. All other directions issued against OPG and its Directors are affirmed. The appeal is partly allowed. j. The intervention applications as well as the appeal of Mr. A. Kumar are rejected.
Issues Involved:
1. Whether the TCP-IP architecture for TBT data feed provided fair and equitable access to all TMs. 2. Whether access to the secondary server had the advantage of receiving information early and what was the mechanism in NSE to monitor the secondary server misuse. 3. Liability of NSE under SEBI PFUTP Regulations, 2003 and SECC Regulations, 2012. 4. Liability of employees of NSE for violation of PFUTP Regulations and SECC Regulations. Issue-wise Detailed Analysis: Issue 1: Whether TCP-IP architecture for TBT data feed provided fair and equitable access to all TMs. - The WTM found that the dissemination of information at the Port level was in a defined sequence, giving an advantage to the TM who logs in first. The absence of a randomizer and load balancer created an inherent advantage for certain TMs. - The Tribunal held that the TCP/IP architecture had an inbuilt randomizer in the dissemination of data from the PDC level to the POP Server level. The flow of data from PDC to POP Server was in a random sequence, and the receipt of information at the Sender Port was not sequential. - The Tribunal found that the absence of a load balancer resulted in inequitable distribution of IPs, leading to varied time lags for data distribution. The load balancer would have ensured fairness, equality, and transparency in the system. - The Tribunal concluded that the TBT architecture provided equal, unrestricted, transparent, and fair access to data dissemination from its TBT architecture to the TMs. Issue 2: Whether access to the secondary server had the advantage of receiving information early and what was the mechanism in NSE to monitor the secondary server misuse. - The WTM found that NSE did not have any defined policies and procedures regarding access to the secondary server, leading to misuse by certain TMs. - The Tribunal found that the secondary server was an active server, and TMs who logged in through the secondary server had an added advantage due to less load on the server. NSE failed to place a mechanism to monitor unauthorized access to the secondary server. - The Tribunal concluded that NSE did not have any defined policy and procedure regarding access to the secondary server, resulting in misuse by some TMs. Issue 3: Liability of NSE under SEBI PFUTP Regulations, 2003 and SECC Regulations, 2012. - The WTM found that NSE had not violated any provision of the PFUTP Regulations since no fraud was committed by NSE or its employees. However, NSE failed to ensure a level playing field for the TMs subscribing to the TBT data feed of NSE, violating Regulation 41(2) of the SECC Regulations, 2012. - The Tribunal held that the choice of the TBT architecture was never disputed, and there was randomness in the dissemination of data from the PDC stage to the Ports. The Tribunal found no violation of Regulation 41(2) of the SECC Regulations. - The Tribunal concluded that NSE provided equal, unrestricted, transparent, and fair access to data dissemination from its TBT architecture to the TMs. However, NSE failed to adhere to its own norms and guidelines and did not follow the circular of 2012. Issue 4: Liability of employees of NSE for violation of PFUTP Regulations and SECC Regulations. - The WTM exonerated all the noticees of the charge of violation of PFUTP Regulations but found Mr. Ravi Narain and Ms. Chitra Ramkrishna liable for breaches of the provisions of SECC Regulations. - The Tribunal found that Mr. Ravi Narain and Ms. Chitra Ramkrishna, being the MD and CEO of NSE, could not abdicate their responsibility by citing limited knowledge in certain spheres of business activities. However, the Tribunal found no finding of wrongful gain by Mr. Ravi Narain and Ms. Chitra Ramkrishna, and the direction to disgorge 25% of their salary was set aside. - The Tribunal concluded that the direction to disgorge from salary was wholly illegal and amounted to penal recovery, which is punitive and not equitable. Separate Judgments: - The Tribunal set aside the order of the WTM directing disgorgement of an amount of Rs.624.89 crores along with interest against NSE. - The Tribunal affirmed the directions prohibiting NSE from accessing the securities market for six months and directing NSE to carry out system audits at frequent intervals. - The Tribunal directed NSE to deposit a sum of Rs.100 crores to the Investor Protection and Education Fund created by SEBI. - The Tribunal set aside the direction to disgorge 25% of the salary from Mr. Ravi Narain and Ms. Chitra Ramkrishna and set aside the prohibition from associating with any listed company or market infrastructure institution for five years. - The Tribunal affirmed the violations committed by OPG but set aside the direction to disgorge Rs.15.57 crores and remitted the matter to the WTM to decide the quantum of disgorgement afresh.
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